Get ready for more ‘Grexit’ speculation

WilliamL. Watts

FRANKFURT (MarketWatch) — Markets are enjoying a summer lull, but German Chancellor Angela Merkel’s domestic political worries and a dire Greek economy may soon reignite speculation Greece will be forced to exit the shared currency sooner rather than later.

While economists debate whether a Greek exit — or “Grexit” — would ultimately be a good thing for both Greece and the euro zone’s remaining 16 members, uncertainty and the prospect for chaos are more likely to trigger another round of turmoil across global markets in the short run, strategists said.

Next week could be crucial. Greek Prime Minister Antonis Samaras is set to meet Merkel in Berlin on Friday and will visit French President François Hollande on Saturday.

He’s reportedly prepared to sound out Merkel on his call to stretch the implementation of new austerity measures over four years rather than the two years agreed as part of the country’s second bailout. Greek news reports, however, said Samaras wouldn’t formally request an extension until a meeting of European Union leaders in October.

Samaras campaigned on that pledge as his center-right New Democracy party eked out a first place finish in June’s parliamentary elections over the left-wing Syriza party, which had vowed to tear up the austerity provisions altogether.

The Greek economy has contracted in 14 of the last 15 quarters and posted a 6.2% year-on-year decline in the second quarter, making it increasingly difficult for the country to repair its balance sheet, noted economists at Rabobank.

“Given the increasingly vocal opposition from German politicians to any further compromises for Greece, there is every chance that Mr. Samaras could find himself being firmly rebuffed by the French and German leaders,” said Simon Derrick, chief currency strategist at Bank of New York Mellon, in a research note.

“Given that extending the austerity program has been a key promise for the [Greek] coalition partners, this could provide the catalyst for some political turbulence in Athens,” he said.

For Merkel, the problem is turbulence at home.

While the chancellor remains popular with the German public a little more than a year ahead of general elections, she’s facing a growing backlash within her own center-right Christian Democratic Union, or CDU, and ruling coalition over the handling of the euro-zone debt crisis.

A weekly poll conducted on behalf of Stern magazine and broadcaster RTL and released Wednesday found Merkel’s CDU had the support of 36% of voters, easily outweighing the center-left Social Democratic Party, or SPD, at 26%, and the Greens at 13%. Merkel’s coalition partner, the libertarian-oriented Free Democrats, stood at 4%, below the 5% threshold it needs to remain in parliament.

Merkel’s personal popularity exceeds support for the CDU, polls show.

At the same time, a recent survey found a majority of Germans believed they would be better off without the euro. That stands in the face of Merkel’s oft-repeated stance that the failure of the euro would mark the failure of Europe.

The euro
EURUSD, -0.0170%
jumped Thursday after Merkel told reporters in Canada that Germany was committed to maintaining the euro and appeared to support European Central Bank President Mario Draghi’s pledge last month that the ECB would do whatever is necessary within its mandate to preserve the currency.

“What [Draghi] said is something that we repeated time and time again” since the start of the debt crisis more than two years ago, “that we feel committed to do everything we can in order to maintain the common currency,” Merkel said in a joint news conference with Canadian Prime Minister Stephen Harper. Read: Merkel says Germany committed to euro.

The euro traded at $1.2350 versus the dollar in recent action, little changed from Thursday but up 0.5% since the beginning of August. The shared currency has tumbled 4.6% versus the dollar since the beginning of the year.

The yield on Spain’s 10-year government bond (10YR_ESP) traded at 6.47% on Friday, down 0.05 percentage point from Thursday and well off euro-era record highs above 7.60% set last month before Draghi made his pledge.

While Merkel appeared to back Draghi, members of her coalition have criticized his proposal for the ECB to resume buying bonds of troubled countries in the secondary market provided they first apply for help from the region’s rescue funds and agree to abide by strict conditions.

But it’s Greece that could steal the focus in the short term.

The country shouldn’t have any problem meeting a €3.8 billion ($4.7 billion) debt repayment due on Monday after successfully selling more than €4 billion in Treasury bills earlier this week.

Inspectors from Greece’s troika of international lenders — the European Commission, the International Monetary Fund and the European Central Bank — will return to Athens next month.

The ultimate crunch could come at a planned Oct. 8 meeting of euro-zone finance ministers, where a decision will have to be made regarding whether to release the second tranche of aid under Greece’s second bailout, which was originally due in June, said Christoph Rieger, strategist at Commerzbank.

Earlier this week, Michael Fuchs, the CDU’s deputy parliamentary floor leader, warned that Germany would block further aid for Greece if it doesn’t stick to bailout terms.

“If we are convinced that Greece has not met the requirements, then we will exercise this veto. Germany has reached the limit of its capacity,” Fuchs told the Handelsblatt newspaper.

Another senior Christian Democrat made headlines this week when he accused Merkel of crushing dissent within the CDU. Josef Schlarmann told a regional newspaper that the CDU under Merkel was “like eating in a college canteen which offers only one choice of meal a day. Anyone who doesn’t like the taste is kept away.”

Earlier this summer, senior members of the Christian Social Union, the conservative, Bavarian sister party of the CDU, urged Greece’s exit from the monetary union. Economy Minister Philipp Roesler, who is also chairman of the junior coalition partner Free Democrats, told a German magazine this week that Germany would block further aid if Greece doesn’t fall in line.

The debate hasn’t been a one-way affair, however. German Foreign Minister Guido Westerwelle, a former leader of the Free Democrats, told Der Spiegel magazine on Wednesday that Greece should be granted more time to put austerity measures in place in order to make up for time lost during this year’s Greek election campaign.

Still, “explicit resistance in Germany to the assumption of additional liabilities by the German taxpayer appears to have been rising — including among leading members of Ms. Merkel’s CDU/CSU/FDP coalition,” said Alastair Newton, senior political analyst at Nomura in London.

“The very public nature of these objections would make it difficult, in our view, for the individuals concerned to back down which, in turn, makes it increasingly unlikely in the current circumstances that Ms. Merkel will be able to claw back her recently lost ‘chancellor’s majority’ in the Bundestag,” he said.

The Bundestag, the lower house of Germany’s parliament, last month overwhelmingly backed legislation in a 473-97 vote authorizing Germany’s participation in a €100 billion euro bailout of Spain’s banking sector. She fell short, however, of the 311 votes from her own 330-member coalition — a so-called chancellor’s majority — needed to ensure she wouldn’t need help from opposition parties.

In the end, overwhelming support from opposition lawmakers ensured easy passage.

Indeed, opposition parties, particularly the SPD, have called for a swifter move toward fiscal union and the introduction of euro-zone bonds in an effort to save the euro.

But that may soon change, Newton said.

As elections near, opposition parties may be less likely to back Merkel in an effort to weaken her standing.

“We expect the SPD and the Greens to look to extract significant concessions from Ms. Merkel for their support in any further euro-zone-related Bundestag votes, potentially delaying time-sensitive legislation as well as spilling over into important domestic legislation,” he said, in a research note.

In turn, that is likely to spur Merkel and Finance Minister Wolfgang Schaeuble to avoid introducing crisis-related legislation and may also encourage them to come down hard against any further aid for Greece to the point of possibly “encouraging a Grexit, not least to try to exploit it and its consequences to bolster domestic — and wider euro-zone — support for the Merkel blueprint,” he said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.